The September UK inflation reading released this morning is sending a dovish signal to the Bank of England and weighing on the pound. Headline inflation remained unchanged at 3.8% (consensus 4.0%), while core slowed down from 4.6% to 3.5% and services CPI stabilised at 4.75% versus expectations of 4.8% and 0.3pp below the BoE’s latest forecast, ING's FX analyst Francesco Pesole notes.

EUR/GBP into year-end to traade at 0.88

"Our UK economist notes that the main dovish surprise comes from food prices – a big concern for the BoE of late – which actually fell on the month and are now 0.5pp below the BoE's August forecasts. Our call is that this 3.8% marks the peak for headline inflation, and we expect it to be 3.5% for the remaining three months of the year, before falling back from January."

"All this should not be enough to bring a November rate cut back on the table, but it definitely increases the chances of a December move. For that, the Autumn Budget will play a pivotal role, where a stricter commitment to fiscal rigour can be the trigger for a ‘Christmas cut’."

"Markets are pricing in 10bp of easing for December, which leaves ample room for potential dovish repricing hitting the pound in the coming weeks – even if our official call still narrowly favours February for the next cut. Our call remains for EUR/GBP strength into year-end, with a 0.88 target."